The sale of small businesses grew significantly in the first half of 2013. According to BizBuySell.com’s latest Insight Report, the number of closed transactions grew over 60 percent during the second quarter and almost 56 percent during the first quarter of this year compared to the same periods in 2012. Curtis Kroeker of BizBuySell.com attributes the spike to pent-up demand as buyers are finally feeling confident enough to go ahead and buy, and investors are also more willing to provide the capital to fund the transactions. That's good news if you have a profitable company you want to sell. The trick is finding the right buyer.
What Drives Buyers
Selling your business can be a lengthy and complicated process. It can go smoothly and quickly if you figure out the right type of buyer at the beginning of that process.
I organize potential buyers into three categories: strategic, financial and operator. Each type of buyer will see your business in a different light, assign value to it accordingly and manage it differently once the transaction is a success. If you want to sell at the highest possible price, you need to make an informed decision as to which type of buyer is willing to pay the most for your particular business. You also need to discard any types of buyers that won’t take your business seriously because of other factors like size, profitability, location and sector.
Strategic buyers usually consist of companies already operating in your industry or those that are seeking to enter it. They tend to be larger companies, but sometimes smaller businesses with a strong financial position seek to expand aggressively by buying up larger players. Strategic buyers tend to buy for one of four reasons:
- Horizontal expansion. This is when a company wants to do more of the same. An example would be a regional auto parts retailer buying a business with locations in neighboring counties.
- Vertical expansion. This is when a company wants to move up or down the value chain. An example would be a manufacturer of beauty products and creams buying a beauty supply retail chain.
- Rubbing out the competition. This is when a company wants to buy your business mainly to shut it down, eliminating a threat to their profitability and growth.
- Synergy. This over-used buzzword means that each of the companies excel in different ways and combining the two companies eliminates operational weaknesses. An example would be a furniture retailer with outstanding locations and a huge customer list buying another retailer with outstanding manufacturer relationships and an established brand.
When it comes to pricing, strategic buyers tend to pay the most because they have an identified need and significant resources.
Financial buyers consist of professional investors. They come in many forms: private equity firms, investment partnerships, hedge funds and more. These buyers only think in terms of cash flow and hidden value. Your business is seen as an opportunity to acquire an existing or potential stream of cash flow at an attractive price. Sometimes financial buyers want to acquire your business with the intention of having you run it. These transactions happen when they believe they are buying at a low price and they can sell for more in the future. Others want to buy because they see your business as a mismanaged asset with potential. In their hands they believe they can do a better job of increasing the cash generated by your business, thereby increasing its value and allowing them to eventually sell it at a much higher price.
Financial buyers tend to negotiate the most aggressively when it comes to price.
Operators are people like you—a person or a group of partners that want to run a successful business. Their intention is to buy your business so they can enjoy a nice lifestyle, good income and possibly sell it to someone else when they are ready. Many times you will come across inexperienced buyers who are looking for a life change or a career change. They will likely need the most handholding of the three groups since buying a business is a one-off or occasional experience for them. While any type of buyer can be fickle, the operators will likely have the most difficult time securing financing, making these transactions somewhat riskier.
When it comes to price negotiations, operators will not be as sophisticated as strategic and operational buyers, but they may also have more limited resources.
Ranking The Types Of Buyers
With a proper understanding of the motivations of different classes of buyers, you should consider ranking them based on how they will see you. Develop a matrix where you rank the three classes of buyers (strategic, financial and operator) based on how attractive core parts of your business will be to them. Your matrix could look something like this:
Current scale of your business
Projected revenue growth
Current EBITDA margin
Tangible assets (real estate, equipment)
Preparing this type of rank will help you see your business from the perspective of potential buyers. This will also serve to help you later on when it comes time to negotiate price and sales terms.
Are you thinking about selling your business? Have you given any thought to the type of buyer that would be best? Share your thoughts in the comments below.
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